In The Network - Monero

Miners, Fees, Sidechains

You’re on the free list for Formal Verification research. Join the other Formal Verification members today and receive complete research and member-only bonus content.


Monero

Created in 2014, Monero is a proof-of-work (PoW) privacy-focussed cryptocurrency that uses technologies like ring signatures, ring CT, and stealth addresses to obfuscate transaction details from outside observers, such as receiver, sender, and amount.

Transactions

We can compare transactions on Monero to shielded transactions on Zcash, which offers both transparent and shielded transaction types. Today, Monero has ~92% of the fully shielded transaction count ‘share’ with Zcash and it’s likely that Monero’s large dominance over the years has been due to Zcash’s privacy optionality on the network. However, it is important to note that fully shielded activity on Zcash might start increasing as mobile lite clients make interaction with Zcash’s anonymity set easier.

Miners

The Monero community has historically taken a stance against the usage of ASIC mining. The introduction of ASIC miners on the network before 2018 meant that the CPU and GPU based miners were becoming increasingly unprofitable through their relative inefficiencies. The Monero community responded to this ASIC development with a number of hard forks throughout 2018 and 2019. Two notable drops in hashrate are clearly visible during the Lithium Luna hard fork in 2018 as well as the hard fork in early 2019 (declines of 74% and 70% respectively) suggesting a reduction of ASIC usage on the network.

The most recent hard fork introduced the RandomX mining algorithm, which was chosen because of its random code execution and memory-intensive techniques. The net effect being a significant competitive advantage of CPU mining over ASICs using Monero’s CryptoNight and general GPUs. Moreover, the implementation of RandomX is expected to reduce the presence of botnets and malware mining due to the hash function’s storage requirements although this is hard to validate.

Importantly, CryptoNight and RandomX hashes cannot be compared directly, but there does seem to be increased mining interest since the introduction of RandomX in November last year - notice how hashrate has climbed 86% since the initial spike when RandomX was implemented. Hashrate is now at a near-ATH standing at 1.5 GH/s.

But the key question is whether the subsequent rise in mining power can be attributable to (new) ASIC activity in any way. Looking at Monero’s nonce distribution, we can see no obvious continuation of pre-existing visual nonce patterns that might be expected if dedicated ASIC hardware remained on the network (Source: Hashvaults).

In the graph below, nonces are represented by orange dots and the blue line is the difficulty. This would seem to suggest RandomX has been largely effective at eliminating ASIC involvement on the network.

Switching to Monero’s monetary policy, just under 96% of the total XMR supply that will exist by May 2022 (18.4m XMR) has been mined. For the second half of 2019, Monero started having a slightly lower annual inflation rate than Bitcoin. However, this trend flipped once again this year - annual inflation rate today is 2.4% which is currently slightly higher than Bitcoin’s ~1.8% since the recent Bitcoin halvening in May.

Critically, the Monero community settled on implementing a ‘tail emission’, which will distribute 0.6 XMR (~$38 at current prices) to miners in perpetuity in the form of block rewards starting around May 2022. In other words, the tail emission will only come into effect when the main emission has been completed. The rationale behind the tail emission was to compensate competitive miners who have to participate with Monero’s dynamic block sizes - by rewarding miners with a small nominal inflation rate forever, it is hoped that the fee markets will be able to develop more effectively on the network.

Fees

Supporting dynamic block sizes for Monero means that the fee dynamics are rather different to other networks, such as Bitcoin. In general, we can expect Monero miners to compete more heavily with fees. Therefore, the long-term incentives for miners will have to come from the aggregate fees collected from a consistent high number of network transactions and/or through block rewards issuance (i.e. tail emission).


Share

Formal Verification research is not investment advice and is strictly for informational purposes only. Please conduct your own research.